Here’s One (More) Reason Inflation Could Accelerate Through Mid-2022

It’s no secret that pandemic-related government policy is driving at least some of the inflation currently being experienced in the United States. Indeed, real disposable income per capita has deviated from a linear trend in a meaningful way since 2020. The recent “breakout” in real disposable income was on top of the (much smaller) juicing provided by the Tax Cuts and Jobs Act in 2018, so it’s fair to say households have been feeling flush for some time now. As we will get to shortly, flush households mean more consumer spending. More consumer spending drives prices higher, especially when supply is limited.

In this next chart we show the 1-year change in real disposable income per capita. In early 2020, it exceeded the highest level in the history of the dataset, and it continued making new highs through the early part of this year. If we just count the extra disposable income on a per capita since the pandemic started – that is, the cumulative amount of disposable income that exceeded the pre-covid trend – it amounts to about $10,500 per person. Multiply this by the population of the country (about 330m), and we get to a figure of $3.5tn. It is thus no wonder inflation has accelerated to 30-year highs, especially when we consider shortages in the supply chain.